1. KOREA TECHNOLOGIES CO., LTD.

, v Judge Lerma

G.R. No. 143581 January 7, 2008

FACTS:

Petitioner Korea Technologies Co., Ltd. (KOGIES) is a Korean corporation

which is engaged in the supply and installation of Liquefied Petroleum Gas
(LPG) Cylinder manufacturing plants, while private respondent Pacific
General Steel Manufacturing Corp. (PGSMC) is a domestic corporation. On
March 5, 1997, PGSMC and KOGIES executed a Contract in the Philippines
whereby KOGIES would set up an LPG Cylinder Manufacturing Plant in
Carmona, Cavite. On April 7, 1997, the parties amended the said contract in
Korea stipulating that the machinery and facilities necessary for
manufacturing LPG cylinders for which PGSMC would pay USD 1,224,000.
KOGIES would install and initiate the operation of the plant for which PGSMC
bound itself to pay USD 306,000 upon the plant’s production of the 11kg.
LPG cylinder samples. Thus, the total contract price amounted to USD
1,530,000.

On October 14, 1997, PGSMC entered into a Contract of Lease with Worth
Properties, Inc. (Worth) for use of the latter's property as the former's
warehouse building to house the LPG manufacturing plant. However, after
the installation of the plant, the initial operation could not be conducted as
PGSMC encountered financial difficulties affecting the supply of materials,
thus forcing the parties to agree that KOGIES would be deemed to have
completely complied with the terms and conditions of the March 5, 1997
contract.

For the remaining balance for the installation and initial operation of the
plant, PGSMC issued two postdated checks. When KOGIES deposited the
checks, these were dishonored for the reason "PAYMENT STOPPED." Thus,
on May 8, 1998, KOGIES sent a demand letter to PGSMC threatening
criminal action for violation of Batas Pambansa Blg. 22 in case of
nonpayment.

On May 14, 1998, PGSMC replied that the two checks it issued KOGIES were
fully funded but the payments were stopped for reasons previously made
known to KOGIES.
On June 1, 1998, PGSMC informed KOGIES that PGSMC was canceling their
Contract on the ground that KOGIES had altered the quantity and lowered
the quality of the machineries and equipment it delivered to PGSMC, and
that PGSMC would dismantle and transfer the machineries, equipment, and
facilities installed in the Carmona plant. Five days later, PGSMC filed before
the Office of the Public Prosecutor an Affidavit-Complaint for Estafa against
Mr. Dae Hyun Kang, President of KOGIES.

On June 15, 1998, KOGIES wrote PGSMC informing the latter that PGSMC
could not unilaterally rescind their contract nor dismantle and transfer the
machineries and equipment on mere imagined violations by KOGIES. It also
insisted that their disputes should be settled by arbitration as agreed upon in
Article 15, the arbitration clause of their contract.

On June 23, 1998, PGSMC again wrote KOGIES reiterating the contents of its
June 1, 1998 letter threatening that the machineries, equipment, and
facilities installed in the plant would be dismantled and transferred on July 4,
1998. Thus, on July 1, 1998, KOGIES instituted an Application for Arbitration
before the Korean Commercial Arbitration Board (KCAB) in Seoul, Korea
pursuant to Art. 15 of the Contract as amended.

On July 3, 1998, KOGIES filed a Complaint for Specific Performance, against

PGSMC before the RTC of Muntinlupa City. The RTC granted a temporary
restraining order (TRO) which was subsequently extended. In its complaint,
KOGIES alleged that PGSMC had initially admitted that the checks that were
stopped were not funded but later on claimed that it stopped payment of the
checks for the reason that "their value was not received" as the former
allegedly breached their contract by "altering the quantity and lowering the
quality of the machinery and equipment" installed in the plant and failed to
make the plant operational although it earlier certified to the contrary as
shown in Certificate.

Likewise, KOGIES averred that PGSMC violated Art. 15 of their Contract, as

amended, by unilaterally rescinding the contract without resorting to
arbitration. KOGIES also asked that PGSMC be restrained from dismantling
and transferring the machinery and equipment installed in the plant which
the latter threatened to do on July 4, 1998.

On July 9, 1998, PGSMC filed an opposition to the TRO arguing that KOGIES
was not entitled to the TRO since Art. 15, the arbitration clause, was null
and void for being against public policy as it ousts the local courts of
jurisdiction over the instant controversy.

The trial court denied the application for preliminary injunction and
declaredthe arbitration agreement null and void. Korea Tech moved to
dismiss the counterclaims for damages.

Korea Tech filed a petition for certiorari before the Court of Appeals (CA).
The court dismissed the petition and held that an arbitration clause which
provided for a final determination of the legal rights of the parties to the
contract by arbitration was against public policy. Further appeal was made to
the Supreme Court by way of a petition for review.

ISSUE:

Whether Art. 15 or the arbitration clause of their contract is valid.

HELD:

YES. Art. 15 of the Contract, the arbitration clause, provides:

Article 15. Arbitration. All disputes, controversies, or differences which

may arise between the parties, out of or in relation to or in connection
with this Contract or for the breach thereof, shall finally be settled by
arbitration in Seoul, Korea in accordance with the Commercial Arbitration
Rules of the Korean Commercial Arbitration Board. The award rendered by
the arbitration(s) shall be final and binding upon both parties concerned.

Established in this jurisdiction is the rule that the law of the place where the
contract is made governs. Lex loci contractus. The contract in this case
was perfected here in the Philippines. Therefore, our laws ought to govern.
Nonetheless, Art. 2044 of the Civil Code sanctions the validity of mutually
agreed arbitral clause or the finality and binding effect of an arbitral award.
Art. 2044 provides, Any stipulation that the arbitrators award or decision
shall be final, is valid, without prejudice to Articles 2038, 2039 and 2040.

It has not been shown to be contrary to any law, or against morals, good
customs, public order or public policy. The arbitration clause stipulates that
the arbitration must be done in Seoul, Koreain accordance with the
Commercial Arbitration Rules of the KCAB, and thatthe award is final and
binding. This is not contrary to public policy. The Court finds no reason why
the arbitration clause should not be respected andcomplied with by both
parties.

This ruling is consonant with the declared policy in Section 2 of the ADR Act
that “the State (shall) actively promote party autonomy in theresolution of
disputes or the freedom of the parties to make their ownarrangements to
resolve their disputes.” Citing Section 24 of the ADR Act, the Court said the
trial court does not have jurisdiction over disputes that areproperly the
subject of arbitration pursuant to an arbitration clause. In the earlier case of
BF Corporation v. Court of Appeals and Shangri-la Properties, Inc., where
the trial court refused to refer the parties to arbitration notwithstanding the
existence of an arbitration agreement between them, the Supreme Court
said the trial court had prematurely exercised its jurisdiction over the case.

The Court further emphasized that a submission to arbitration is a contract.

As a rule, contracts are respected as the law between the contracting
partiesand produce effect between them, their assigns and heirs. Courts
should liberally review arbitration clauses. Any doubt should be resolved in
favor of arbitration.

An arbitral award in a domestic or international arbitration is subject to

enforcement by a court upon application of the prevailing party for the
confirmation or recognition and enforcement of an award. Under Section 42
of the ADR Act, “The recognition and enforcement of such (foreign) arbitral
awards shall be filed with the Regional Trial Court in accordance with the
rules of procedure to be promulgated by the Supreme Court.”

An arbitral award is immediately executory upon the lapse of the period

provided by law. For an award rendered in domestic or non-international
arbitration, unless a petition to vacate the award is filed within thirty (30)
days from the date ofserve upon the latter, the award is subject to
confirmation by the court. For an award rendered in a domestic,
international arbitration, the period for filing an application to set it aside is
not later than three (3) months from the date the applicant received the
award, otherwise the court shall recognize and enforce it.

The Supreme Court ordered the parties to submit themselves to the

arbitration of their dispute and differences arising from the subject Contract
before the KCAB.